Author: Daling reseaech — bocaibocai.eth

Since the launch of the mainnet in 2015, Ethereum has gone through several updates. Currently, Ethereum is in the third stage of its four planned stages (Frontier, Homestead, Metropolis, Serenity) and is about to start the final stage. In the Serenity stage, the consensus mechanism will convert from POW to POS after the merge of Ethereum beacon chain and origin chain.

Ethereum upgrade could affect the interests of different parties, which are worth billions of dollars. The core developers of Ethereum are very cautious, since the slightest mistake may cause irreparable losses to Ethereum. As a result, the upgrade of Ethereum 2.0 progresses very slowly.

Will the upgrade be beneficial for Ethereum? Will the upgrade go smoothly? Is it the right time to participate Ethereum mining now?

Not really, the upgrade of Ethereum 2.0 is not only a technical problem, but many other factors could affect the upgrade results as well.

We will discuss this from different perspectives listed below:

• Compared with POW, the POS mechanism has a lower threshold for participation, saving more energy, however, with lower mining profits. It is no longer a good time to participate in the POW, and the POS seems to be a good alternative.

• The change of the consensus mechanism will greatly affect the profit distribution: under POW mechanism, miners will share most of the mining profits, however, this will be distributed to the Ethereum Foundation and large ETH holders under the POS mechanism. Many miners have to find alternative ways, such as participating in other POW mining, industrial transformation, participating in other Web3 protocols, or selling off all mining equipment. This leads to much dissatisfaction among POW miners.

• Although POS exceeds POW in terms of security, due to the existence of the joint stake agreement, the centralization problem of Ethereum under the POS equity proof mechanism will be more serious. Is an overly centralized Ethereum really safe?

• Ethereum looks more like "Vitalik's Ethereum" or "Ethereum Foundation's Ethereum". The number of Ethereum requirements for users who want to participate in governance, even for whales, is extremely high. And the potential proposals are mostly technical ones, which are limited in a narrow niche. The core developers will have the decision-making power which is executed by miners. The users seem can only express some ideas that no one really cares about.

• The likelihood of a death spiral is minimal in terms of the tokenomics of Ethereum and other market factors. However, there are still many potential unknown risks could affect Ethereum upgrade, such as hard forks, malicious selling from miners, etc.

(1) Pros and cons of mining under POS and POW mechanism:

POW Proof of Work Consensus Mechanism

In a simple way, miners continuously enumerate a Nonce (a random number) to strive for the right to record the block.

• Pros: No need to buy ETH to get started. Compared with the POS mechanism, it is easier to implement: purchase the equipment that is needed for building a node and start mining. POW is a proven and tested consensus mechanism that has maintained the safety and decentralization of Bitcoin and Ethereum for many years.

• Cons: Not environmental-friendly. It consumes a lot of energy every year, and as the computing power continues to increase, the mining revenue will decrease, and the pool's computing power growth may lead to centralization and security risks. Under the POW mechanism, most of the revenue of Ethereum is distributed to miners.

POS Proof of Stake Consensus Mechanism

In a simple way, the stakers’ staking weight is used to fight for the right to record the block.

• Pros: more environmental-friendly. Miners do not need to buy a lot of hardware and consume energy to invest, they just need to hold enough ETH to participate, and it can effectively reduce the selling pressure of ETH. This is because miners under the POW mechanism will sell the ETH from block reward to compensate mining cost. Moreover, the POS mechanism can effectively improve the TPS (speed of processing transactions) of Ethereum and improve the congestion of Ethereum.

• Cons: It is still in its infancy and has not been tested for long-term practical applications, so there may be potential problems that have not been seen.

(2) Are POW and POS Mining suitable to enter now?

POW mechanism profits

The biggest beneficiary under the Ethereum POW mechanism is miners and the mining equipment manufacturers, which can produce 11.3 million ETH or $13.56 billion revenue per year (calculated at $1,200/ETH on June 16, 2022). As the continuous growth of computing power, the demand for mining equipment such as graphics cards has increased significantly, which indirectly benefits GPU chip companies NVIDIA and AMD, adding $455 billion to the market value of these two manufacturers in 2021. But with the market entering the bear market, the price of Ethereum keeps falling. As of July 12, 2022, the computing power of the entire network was 904.59TH/S.

With the sluggish price of ETH, the mining's income has also fluctuated greatly. From ATH of 0.282 USD/day per 1M computing power down to only 0.017USD/day per 1M computing power. The current GPU graphics card price is based on a 3060Ti at the market price 563.52 USD, computing power of 61M and 0.074 USD per kilowatt-hour of electricity calculation, the static return period is nearly 800 days, which does not seem to be a good time to enter the market.

Profit of POS mechanism

After the implementation of the POS mechanism, miners don’t have to spend a lot of money to purchase hardware thus increasing computing power to obtain more income, but to stake more ETH to obtain higher income. Ethereum 2.0 has a staking yield curve, as the amount of staked ETH decreases, the rate of return will increase. And as the amount of staked ETH increases, the rate of return will decrease. As of July 12, 2022, the rate of return for staking ETH is about 4.2% annually.

There are currently four POS staking options available:

Separate staking: 32 ETH and a professional computer are required. Pros: Access to full rewards and full control of your own;

Cons: It is necessary to keep the continuation power supply, otherwise there will be a relatively small inactivity penalty.

Service provider staking: No equipment required, 32 ETH is required. Pros: No need to spend equipment costs, no need to maintain equipment; Cons: Unable to obtain full rewards, node fees need to be paid, and there is a certain trust risk.

Collection Staking: No equipment, any funds. Pros: low capital threshold, liquidity can be withdrawn at any time; Cons: Unable to obtain full rewards, third-party platform trust risk, smart contract execution risk.

Centralized trading platform: No wallet, any funds. Pros: convenient and fast, low capital threshold; Cons: There are certain risks in the trading platform, and validators are so concentrated that they would threaten the network.

From the above comparison, it can be seen that for those who want to participate in Ethereum mining, it seems to be an unwise choice to participate the POW mining since mining cost is high and the return cycle is too long. Choosing the POS mechanism seems to be the best way to participate in Ethereum mining. The cost depends on the price range of buying ETH purchased, and the income is relatively stable and there is no energy consumption cost.

(3) Where are miners heading after changing to the POS mechanism

Due to the conversion of the POS mechanism, a large number of POW mining nodes will not be able to participate in the mining of Ethereum, and the number of active nodes in Ethereum is expected to drop significantly, which will lead to the migration of a large number of POW miner computing power to other POW mechanism chains (such as ETC) or other web3 protocols. However, the huge computing power that are controlled by Ethereum POW miners is very difficult to digested by another ecological system. Moreover, the migration of computing power will also reduce the mining revenue of the migrated ecology, which also leads to a significant number of miners have to sell their mining equipment to compensate for the loss. There will be a large number of second-hand graphics cards on the market, and the scene of hard-to-find cards may no longer exist.

At present, there are two main tpyes of Ethereum mining devices: ASIC and GPU. ASICs (Application-Specific Integrated Circuits) are computer hardware designed for a specific purpose, and hashing algorithms for Ethereum are written in the Ethereum ASIC mining device. Graphics card-based GPU Mining devices can solve complex PoW calculations and can also be used for more general-purpose applications.

The problem with Ethereum ASIC Mining equipment is that it can only be used for ETH mining and cannot be used for mining with other algorithms. Ethereum Classic (ETC) is the only POW project that can use Ethereum ASIC Mining because Ethereum Classic’s POW algorithm is compatible with Ethereum. At present, the mining income of ETC is already lower than that of ETH under the same conditions. The computing power per 1M is only 0.0116 USD/day, and the static return period reaches more than 1000 days. If a large number of miners flock to ETC, it will cause computing power increase. If the surging revenue declines, then the mining profits of ETC will become unprofitable, and the ASIC mining equipment may be worthless.

For GPU mining devices, there are several options after the Ethereum merger.

Digging into other POW mechanism Tokens

According to Messari's research, the total value of the POW token projects currently available for mining by other GPU mining devices other than ETH is only 3% of the total mineable profit, and the huge computing power of Ethereum cannot be absorbed in other POW tokens, which is only an option available to a few.

Expand business scope

For a large-scale Miner innovative Mining company, it may be a good choice to expand into new business scope. Hut 8 is one of the largest digital asset miners in North America focusing on innovation, bullish on Bitcoin, blockchain, and Web3.0. Bridging the emerging and traditional high-performance computing world, and has invested heavily in high-performance GPU graphics card mining equipment, which allows them to use GPU graphics cards for other high-performance computing power businesses.

January 31, 2022 Hut 8 announced the completion of the acquisition of the TeraGo data center business, through which Hut 8 changed its business structure, creating the first hybrid data center model, while serving traditional high-performance computing (Web2 ) and Web3 and the emerging digital asset computing department. After the merger of Ethereum, the transformed traditional high-performance computing power business and Web3 computing power services related to Web3 infrastructure will be big miner's new revenue source opportunities, but it is obvious that this choice requires the miner to have top-level resources and a large scale, and it is not a path that ordinary miners can choose.

Provide computing power for Web3 protocol

Miners can turn GPU computing power to provide computing power for a few web3 protocols such as: Render Network, Livepeer Network, Akash Network, etc.

Render Network is a high-performance distributed rendering network based on GPU. Users can consume RNDR's GPU computing power to render images at a faster speed and at a lower cost. At the same time, miners can also provide its own GPU to provide rendering computing power for Render Network to earn rewards

Livepeer Network is a decentralized video transcoding network built on the Ethereum blockchain. Livepeer provides a back-end video transcoding and distribution infrastructure on which developers can build applications. Miners can provide GPU computing power to run a node on the Livepeer network that earns block rewards by charging fees for video transcoding.

Akash Network, the world’s first decentralized and open-source cloud, accelerates deployment, scale, efficiency and price performance for high-growth industries like blockchain and machine learning/AI. Known as the “Airbnb for Cloud Compute”, Akash Network provides a fast, efficient and low-cost application deployment solution. Developers leveraging the Akash platform can access cloud computing at three times the cost of centralized providers such as Amazon Web Services, Google Cloud and Microsoft Azure. Akash Network leverages containerization and open source technologies to leverage 85% of the underutilized cloud computing power of 8.4 million global data centers, enabling anyone to buy and sell cloud computing, and Miner can use GPU Mining devices to provide Akash Network Cloud computing power to earn block rewards.

Sell mining equipment for ETH and stake POS or hold cash for other purposes

Miner uses the funds obtained from selling mining equipment in exchange for ETH to become a POS validator node to obtain block rewards or to obtain additional income in the form of MEV (Miner extractable value), which requires the validator to stake at least 32 ETH to receive block rewards. The rate of return will change with the amount of ETH staked and network activities. For miners who have less than 32 ETH or are unwilling to take the risk of node operation, they can obtain income through collection staking or staking of service providers. For most miners even if the POS skating income is not as high as POW, it is a long-term sustainable profit option

Since Ethereum POW carries a huge amount of computing power that other ecosystems can hardly absorb such huge computing power, so not every POW miner can find a profitable solution for computing power transfer, so a large number of miners may choose to sell mining equipment to cover the cost.

(1) "Oligopoly governance"?

As one of the largest public chain ecosystems in Web3, governance has always been an aspect of great concern. The people involved in governance in Ethereum are mainly divided into three groups.

Users: End users who hold ETH and use Ethereum applications, trading platforms, and developers building applications on top of Ethereum.

Miners: An individual or business entity that runs a server node to validate transactions and secure the network (and earn ETH).

Ethereum Core Developers: Developers and researchers who contribute to node software and participate in various technical forums.

Anyone can submit a proposal called Ethereum Improvement Proposal (EIP) on Github. It is not difficult to propose; the difficulty is to make the proposal reasonable and supported by the community. Once the EIP is submitted, it will go through a cycle of technical review, research and discussion.

• Draft - When properly formatted, the EIP editor will merge the EIP into the EIP repository

• ReviewEIP - The author marks the EIP as ready and requests peer review.

• Last Call - An EIP that has gone through its initial iteration and is ready to be reviewed by the community.

• Accepted - An EIP has been in Last Call for at least two weeks, and the developer has addressed all requested technical changes.

• Final - EIPs that the core developers have decided to implement into various clients (Geth, Nethermind, etc.) and release in a future hard fork, or EIPs that have already been released in a hard fork.

The proposal procedure shows that it is very inefficient to implement a proposal, and that the core Ethernet developers hold absolute decision-making power, which reflects some of the problems with Ethereum governance.

The governance mechanism tends to be oligarchic: Ethereum currently reaches consensus through the off-chain community, and proposals must be approved by the community. However, the proposal process is generally controlled by core developers for discussion and many node operators decide whether to implement it or not. ETH holders only have the right to express their opinions off-chain without actual voting rights. Compared with on-chain governance, the democratic foundation has certain deficiencies, and the personal influence of Vitalik is too strong. One person has a decisive influence on the entire Ethereum community.

The governance structure is too narrow: Currently, most of the EIP proposals are proposed by core developers and foundations, and the content mainly includes technology upgrades and patches. With the gradual maturity of Ethereum, issues such as compliance, secondary market, decentralized financial ecology or user experience need to be discussed in the proposal, not just at the technical level, but the technology upgrade is what developers are good at. In this field, the threshold for ordinary participants to participate in governance is too high.

From the perspective of the governance framework, the governance of Ethereum is completely dependent on the core developers of Ethereum and miner. It seems that participation in governance is a very high threshold for ordinary users. At present, the upgrade proposal of Ethereum 2.0 does not mention any changes to the governance structure. After the upgrade of Ethereum 2.0, Ethereum may still continue to have this centralized governance structure. If there is a disagreement within the Ethereum Foundation or serious problems with the influence and credibility of Vitalik, Ethereum may enter a state of governance chaos, which is a relatively big risk for the overall ecosystem of Ethereum. The Ethereum Foundation and Vitalik may need to consider how to optimize the governance structure.

(2) After the Ethereum 2.0 upgrade, security enhancement can also be reflected in the cost of doing evil for POW and POS.

The Cost of Doing Evil Under the POW Mechanism

In brief, the POW mechanism determines the right of block creation by computing power, and the security of this mechanism comes from the decentralization of computing power. In theory, if someone controls more than 50% of the computing power, he has the absolute advantage of obtaining the right of bookkeeping. It means he can create blocks faster, and then tampers with the blockchain data. If someone wants to do evil under the POW mechanism, he needs to control more than 50% of the total computing power of the entire network, and launch a "51% attack". If someone wants to launch a "51% attack", firstly he needs to have more computing power than other miners, which requires a very large amount of money to buy equipment and pay a lot of electricity bills. In addition, the computing power distribution is completely transparent on the blockchain network, and everyone can see what percentage of computing power the leading groups have. When someone tries to buy a large number of mining hardware to increase the computing power until it exceeds 51%, other miners will notice this matter and also add computing power to prevent concentration, which makes it extremely expensive and difficult to increase his computing power proportion beyond 51%. From an economic point of view, the cost of launching a "51% attack" is too high and the profit is too small which is not as good as honest mining. Therefore, it is also a question of whether it is worthwhile to launch a "51% attack".

The Cost of Doing Evil Under the POS Mechanism

In brief, the POS mechanism determines the chance of creating block by the amount of staked ETH and the security of this mechanism comes from the decentralization of staking. Under the POS mechanism, in order to launch an attack, someone needs to stake more than 51% of the ETH in the pool. In this case, the attack cost is much higher than that of the POW mechanism. Besides, the POS mechanism has a forfeiture mechanism. If the validator behaves dishonestly, his stake can be slashed. In the POW mechanism, the mining hardware purchased has at least residual value, while in the POS mechanism, once the assets are forfeited, it is an irreversible huge loss. The necessity of launching an attack under the POS mechanism is also controversial (what kind of profit is worth the risk of losing all the principal). In terms of security, the POS mechanism is superior to the POW mechanism.

(3) While enhancing security, Ethereum 2.0 may face more serious centralization problems

The centralization problem under the POW mechanism before the Ethereum 2.0 upgrade

As the Ethereum ecosystem grows larger and larger, the number of users is increasing, and the computing power of the entire network continues to grow. Under the POW mechanism, miners with low computing power have a very small chance of getting block rewards by mining, so it is a popular choice for small miners to join a Pool (a pool that gathers the computing power of large and small miners). Gathering a lot of computing power, pools have greatly increased probability of mining blocks and then distributing the rewards to miners according to a certain distribution method. However, with the continuous expansion of the pools, Ethereum’s computing power has shown a trend of centralization. A large amount of computing power is concentrated in several pools. According to the data from Etherscan, the top three pools are Ethermine (28.2340%), F2Pool Old (13.2992%), and Hiveon Pool (10.4076%). The excessive concentration of computing power seriously threatens the security of Ethereum ecosystem, which is the biggest concern for the Ethereum Foundation. Now the combined computing power of the top three pools has exceeded 51%. If they launch a "51% attack" jointly, it can be definitely achieved. From the perspective of Vitalik and the Ethereum Foundation, the rapid growth of the miner group has enabled the "miner alliance" to threaten the security of the Ethereum network, which is a thing that Vitalik and the Ethereum Foundation fear and cannot tolerate.

The centralization problem under the POS mechanism after the Ethereum 2.0 upgrade

Since the POS mechanism determines the chance of creating block by the amount of staked ETH, this means the centralization problem of Ethereum has changed from the centralization of computing power to the centralization of staking. This is an absolute advantage for ETH whales. At the same time, the existence of staking protocols will also lead to more severe centralization problems. Due to the existence of liquid staking protocols such as Lido and other collection staking service providers, many Miners who are dissatisfied with 32 ETH threshold or do not want to take the risk of node operation will choose to participate in collection staking, which will lead to excessive concentration of ETH on one protocol or staking service provider.

The current staking distribution chart of Ethereum shows that 31.72% of the total staked ETH is on Lido protocol, and 14.52% of the total staking is on Coinbase, which ranks second. The centralization of the market is very obvious. In addition, because of the intrinsic characteristics of POS, the rich may become richer and richer, and the chips of giant whales will continue to increase, making the chips of retail investors to be a drop in the bucket. What’s more, the Ethereum Foundation holds a large amount of ETH and has an absolute advantage. After the Ethereum 2.0 upgrade, the centralization problem will become increasingly serious. But at the same time, considering the cost of doing evil, the security of POS mechanism is much higher than that of POW mechanism at the mathematical level. The combination of higher security and more centralized trends may seem contradictory, which has also been a hot controversy over Ethereum 2.0.

(4) After the Ethereum 2.0 upgrade, will there be a death spiral in Ethereum under extreme market conditions?

What is death spiral?

Will the changes in the consensus mechanism of Ethereum 2.0 put Ethereum at a potential risk of death spiral? Before discussing this issue, it is necessary to understand what a death spiral is. In brief, it is a vicious cycle that leads to a series of stampede reactions and finally collapses.

It’s just like when LUNA crashed. The mechanism of LUNA is that $1 worth of LUNA can mint $1 worth of UST. Smart contracts cannot be tampered with, and this mechanism maintains the value of UST through market arbitrage. When Terra had liquidity problems, UST depegged from the value of $1, and a large number of people bought UST minted LUNA for under $1 for arbitrage. Many people buy UST for less than $1 to mint LUNA for arbitrage. More and more LUNA was minted, but the liquidity of the stablecoins on the Terra quickly dried up as many people sold LUNA. Many people began to use cross-chain bridges to transfer assets, causing blockchain congestion, so that people cannot arbitrage to eliminate the price difference. Panic began to spread and the death spiral finally started. More and more UST holders minted LUNA with devalued UST and dumped it.LUNA was hyperinflationary and was sold off heavily. As UST remains decoupled, UST holders continue to mint LUNA, and LUNA continues to inflate. LUNA will be constantly minted as long as UST does not return to $1 value. However, due to liquidity exhaustion, UST could not return to $1, and the price of LUNA could not stop the plunge until the Terra blockchain stopped creating blocks. LUNA's death spiral was caused by the joint efforts of flawed economic model design, liquidity problems and a stampede of panic.

Will there be a death spiral in Ethereum 2.0？

Let’s see the economic model of Ethereum. Under the POW mechanism, ETH is mined by computing power, and consumed by paying GAS fees to complete on-chain transactions. After converting to POS, the way to obtain ETH will be staking ETH and getting incentivised. Compared with the POW mechanism, the inflation under the POS mechanism is lower, from about 4.3% to about 0.22%. Thanks to the Ethereum network's performance enhancement and cost reduction, the demand for Ethereum network usage will also increase, and thus stimulate the growth of burning volume. In terms of the tokenomics, Ethereum does not have a binding mechanism of burning and minting like LUNA, so Ethereum does not have a design flaw that will lead to a death spiral.

When the price of Ethereum fluctuates violently, will stakers withdraw their staked ETH and sell it, which leads to a death spiral of ETH? In terms of the staking mechanism, before the "Shanghai upgrade", stakers cannot withdraw the staked ETH; after the "Shanghai upgrade", withdrawal is opened, and stakers will be free to withdraw the staked ETH. So when the price of Ethereum fluctuates violently, will people withdraw their staked ETH and sell off?

Analysing from the perspective of investors’ psychology, when the market fluctuates violently, it is usually small investors who panic and sell assets at a low price, while large investors usually buy low and sell high. Therefore, even if the price of Ethereum fluctuates sharply, it is true that some people will withdraw their staked ETH and sell it, but it will not lead to a death spiral.

First of all, the rewards of Ethereum staking will fluctuate with the total value of staked ETH. For the firm holders of Ethereum, the reduction of staked volume will increase their yield rate. Even if the price of Ethereum fluctuates violently, it is only a short-term selling pressure for Ethereum, which is not enough to cause a stampede market. For the firm holders of Ethereum, it is a really good thing for them to buy chips at a low price at this time. In addition, the increase in yield rate caused by the reduction in the amount of staking will attract more staking, which may just be a constant shuffling process for Ethereum rather than a death spiral.

So under what circumstances will everyone sell off Ethereum and lead to a death spiral? I think it may only be a very serious problem in Ethereum itself that causes the entire ecosystem to collapse. This situation currently appears to be almost impossible.

(5). Since the probability of the death spiral happening is very small, will Ethereum 2.0 have a hard fork because of the disagreement with miners?

Before discussing whether there will be a hard fork in Ethereum 2.0, let’s explain what a hard fork and a soft fork are and what is the difference between them.

When there is a serious disagreement in the blockchain, it may cause a fork. Besides, the addition and upgrade of some protocols may also need to be implemented through forks.

Hard fork: A hard fork is defined as a permanent divergence in the blockchain. After the release of the new consensus, some nodes that have not been upgraded cannot verify the blocks generated by the upgraded nodes. At this time, a hard fork will occur. When a hard fork occurs, two blockchains with the same ledger before a certain block are created.

The most typical case is the hard fork of Ethereum and Ethereum Classic: The DAO is a crowdfunding project initiated by the blockchain company Slock.it. On April 30, 2016, The DAO project started crowdfunding, the project token is DAO, and the crowdfunding time was 28 days. The DAO raised more than 12 million Ethereum, accounting for 14% of the total amount of Ethereum at that time, which was worth more than 150 million US dollars. More than 11,000 people participated in this crowdfunding. But The DAO's code has a major flaw that allows attackers to steal ETH from the decentralized organization. The hackers stole roughly $50 million worth of ETH. This was a big blow to Ethereum at the time, so after intense discussions in the community, Vitalik Buterin, the founder of Ethereum, decided to implement a hard fork to roll back the losses. However, some people adhere to the principle that the blockchain cannot be tampered with and refuse to upgrade, so Ethereum was split into Ethereum Classic and Ethereum.

Soft forks: Soft forks are softer than hard forks. After the release of the new consensus, nodes that have not been upgraded will generate invalid blocks because they do not know the new consensus, resulting in temporary forks. The old and new nodes coexist without affecting the stability and effectiveness of the entire system. The old node can be compatible with the new node, but the new node cannot be compatible with the old node. The two will coexist on the chain until the upgrade is completed. The soft fork will not lead to the emergence of two blockchains.

Will there be a hard fork in Ethereum 2.0? My answer is there is a possibility. Although the upgrade proposal is mainly proposed and decided by the core developers of Ethereum, it will ultimately be executed by the miners. Since the upgrade of Ethereum 2.0 completely harmed the interests of miners and caused strong dissatisfaction among them. Most miners have no choice but to sell mining hardware and find another cryptocurrency to do mining works, so the upgrade of Ethereum is very likely to face resistance from miners. It is still possible for the miners to unite to sell in revenge, or initiate a hard fork.

Compared with the POW mechanism, the POS mechanism has lower rewards, but it is more environmental-friendly, relatively centralized, less inflation, higher security and higher TPS. Although the ideal POS mechanism will make the Ethereum ecosystem more sustainable, it will be full of unknowns after it is truly implemented since it is not time-tested.

The POS mechanism makes the biggest beneficiaries transfer from the miners to the Ethereum Foundation and stakers, which arouses the dissatisfaction of stakeholders headed by miners, who face the problem of where to go. Although a small amount of computing power can be migrated to other ecosystems, most miners may have to sell mining hardware in exchange for ETH to become stakers or to do something else. This is a loss of interest for most miners, which makes it possible to encounter some retaliatory behaviors during the upgrade of Ethereum 2.0, such as selling off and hard forks.

Let’s explore the changes in Ethereum 2.0 from a few other views. In terms of governance structure, the decision-making of Ethereum is basically in the hands of the Ethereum Foundation and core developers. Besides, Vitalik’s personal influence is too large, and the scope of governance proposals is too narrow, which will lead to the oligarchy of Ethereum’s governance. In terms of potential risks, the probability of Ethereum's death spiral is minimal, but the more threatening risks actually come from the increasing trend of centralization. Especially after the implementation of the POS mechanism, collection staking makes the staking protocols like Lido coconcentrate a lot of staked ETH, resulting in serious centralization. However, it can be seen from the characteristics of Ethereum 2.0 that it has higher security than the POW mechanism and a very high cost of doing evil. When high security and a more centralized trend are combined, these two seem to be contradictory, which is a point that has been debated for a long time.

Translation: @Yue, @Chauncey

Profreading: @Diamond

Layout：@Coucou

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Author: Daling reseaech — bocaibocai.eth

Since the launch of the mainnet in 2015, Ethereum has gone through several updates. Currently, Ethereum is in the third stage of its four planned stages (Frontier, Homestead, Metropolis, Serenity) and is about to start the final stage. In the Serenity stage, the consensus mechanism will convert from POW to POS after the merge of Ethereum beacon chain and origin chain.

Ethereum upgrade could affect the interests of different parties, which are worth billions of dollars. The core developers of Ethereum are very cautious, since the slightest mistake may cause irreparable losses to Ethereum. As a result, the upgrade of Ethereum 2.0 progresses very slowly.

Will the upgrade be beneficial for Ethereum? Will the upgrade go smoothly? Is it the right time to participate Ethereum mining now?

Not really, the upgrade of Ethereum 2.0 is not only a technical problem, but many other factors could affect the upgrade results as well.

We will discuss this from different perspectives listed below:

• Compared with POW, the POS mechanism has a lower threshold for participation, saving more energy, however, with lower mining profits. It is no longer a good time to participate in the POW, and the POS seems to be a good alternative.

• The change of the consensus mechanism will greatly affect the profit distribution: under POW mechanism, miners will share most of the mining profits, however, this will be distributed to the Ethereum Foundation and large ETH holders under the POS mechanism. Many miners have to find alternative ways, such as participating in other POW mining, industrial transformation, participating in other Web3 protocols, or selling off all mining equipment. This leads to much dissatisfaction among POW miners.

• Although POS exceeds POW in terms of security, due to the existence of the joint stake agreement, the centralization problem of Ethereum under the POS equity proof mechanism will be more serious. Is an overly centralized Ethereum really safe?

• Ethereum looks more like "Vitalik's Ethereum" or "Ethereum Foundation's Ethereum". The number of Ethereum requirements for users who want to participate in governance, even for whales, is extremely high. And the potential proposals are mostly technical ones, which are limited in a narrow niche. The core developers will have the decision-making power which is executed by miners. The users seem can only express some ideas that no one really cares about.

• The likelihood of a death spiral is minimal in terms of the tokenomics of Ethereum and other market factors. However, there are still many potential unknown risks could affect Ethereum upgrade, such as hard forks, malicious selling from miners, etc.

(1) Pros and cons of mining under POS and POW mechanism:

POW Proof of Work Consensus Mechanism

In a simple way, miners continuously enumerate a Nonce (a random number) to strive for the right to record the block.

• Pros: No need to buy ETH to get started. Compared with the POS mechanism, it is easier to implement: purchase the equipment that is needed for building a node and start mining. POW is a proven and tested consensus mechanism that has maintained the safety and decentralization of Bitcoin and Ethereum for many years.

• Cons: Not environmental-friendly. It consumes a lot of energy every year, and as the computing power continues to increase, the mining revenue will decrease, and the pool's computing power growth may lead to centralization and security risks. Under the POW mechanism, most of the revenue of Ethereum is distributed to miners.

POS Proof of Stake Consensus Mechanism

In a simple way, the stakers’ staking weight is used to fight for the right to record the block.

• Pros: more environmental-friendly. Miners do not need to buy a lot of hardware and consume energy to invest, they just need to hold enough ETH to participate, and it can effectively reduce the selling pressure of ETH. This is because miners under the POW mechanism will sell the ETH from block reward to compensate mining cost. Moreover, the POS mechanism can effectively improve the TPS (speed of processing transactions) of Ethereum and improve the congestion of Ethereum.

• Cons: It is still in its infancy and has not been tested for long-term practical applications, so there may be potential problems that have not been seen.

(2) Are POW and POS Mining suitable to enter now?

POW mechanism profits

The biggest beneficiary under the Ethereum POW mechanism is miners and the mining equipment manufacturers, which can produce 11.3 million ETH or $13.56 billion revenue per year (calculated at $1,200/ETH on June 16, 2022). As the continuous growth of computing power, the demand for mining equipment such as graphics cards has increased significantly, which indirectly benefits GPU chip companies NVIDIA and AMD, adding $455 billion to the market value of these two manufacturers in 2021. But with the market entering the bear market, the price of Ethereum keeps falling. As of July 12, 2022, the computing power of the entire network was 904.59TH/S.

With the sluggish price of ETH, the mining's income has also fluctuated greatly. From ATH of 0.282 USD/day per 1M computing power down to only 0.017USD/day per 1M computing power. The current GPU graphics card price is based on a 3060Ti at the market price 563.52 USD, computing power of 61M and 0.074 USD per kilowatt-hour of electricity calculation, the static return period is nearly 800 days, which does not seem to be a good time to enter the market.

Profit of POS mechanism

After the implementation of the POS mechanism, miners don’t have to spend a lot of money to purchase hardware thus increasing computing power to obtain more income, but to stake more ETH to obtain higher income. Ethereum 2.0 has a staking yield curve, as the amount of staked ETH decreases, the rate of return will increase. And as the amount of staked ETH increases, the rate of return will decrease. As of July 12, 2022, the rate of return for staking ETH is about 4.2% annually.

There are currently four POS staking options available:

Separate staking: 32 ETH and a professional computer are required. Pros: Access to full rewards and full control of your own;

Cons: It is necessary to keep the continuation power supply, otherwise there will be a relatively small inactivity penalty.

Service provider staking: No equipment required, 32 ETH is required. Pros: No need to spend equipment costs, no need to maintain equipment; Cons: Unable to obtain full rewards, node fees need to be paid, and there is a certain trust risk.

Collection Staking: No equipment, any funds. Pros: low capital threshold, liquidity can be withdrawn at any time; Cons: Unable to obtain full rewards, third-party platform trust risk, smart contract execution risk.

Centralized trading platform: No wallet, any funds. Pros: convenient and fast, low capital threshold; Cons: There are certain risks in the trading platform, and validators are so concentrated that they would threaten the network.

From the above comparison, it can be seen that for those who want to participate in Ethereum mining, it seems to be an unwise choice to participate the POW mining since mining cost is high and the return cycle is too long. Choosing the POS mechanism seems to be the best way to participate in Ethereum mining. The cost depends on the price range of buying ETH purchased, and the income is relatively stable and there is no energy consumption cost.

(3) Where are miners heading after changing to the POS mechanism

Due to the conversion of the POS mechanism, a large number of POW mining nodes will not be able to participate in the mining of Ethereum, and the number of active nodes in Ethereum is expected to drop significantly, which will lead to the migration of a large number of POW miner computing power to other POW mechanism chains (such as ETC) or other web3 protocols. However, the huge computing power that are controlled by Ethereum POW miners is very difficult to digested by another ecological system. Moreover, the migration of computing power will also reduce the mining revenue of the migrated ecology, which also leads to a significant number of miners have to sell their mining equipment to compensate for the loss. There will be a large number of second-hand graphics cards on the market, and the scene of hard-to-find cards may no longer exist.

At present, there are two main tpyes of Ethereum mining devices: ASIC and GPU. ASICs (Application-Specific Integrated Circuits) are computer hardware designed for a specific purpose, and hashing algorithms for Ethereum are written in the Ethereum ASIC mining device. Graphics card-based GPU Mining devices can solve complex PoW calculations and can also be used for more general-purpose applications.

The problem with Ethereum ASIC Mining equipment is that it can only be used for ETH mining and cannot be used for mining with other algorithms. Ethereum Classic (ETC) is the only POW project that can use Ethereum ASIC Mining because Ethereum Classic’s POW algorithm is compatible with Ethereum. At present, the mining income of ETC is already lower than that of ETH under the same conditions. The computing power per 1M is only 0.0116 USD/day, and the static return period reaches more than 1000 days. If a large number of miners flock to ETC, it will cause computing power increase. If the surging revenue declines, then the mining profits of ETC will become unprofitable, and the ASIC mining equipment may be worthless.

For GPU mining devices, there are several options after the Ethereum merger.

Digging into other POW mechanism Tokens

According to Messari's research, the total value of the POW token projects currently available for mining by other GPU mining devices other than ETH is only 3% of the total mineable profit, and the huge computing power of Ethereum cannot be absorbed in other POW tokens, which is only an option available to a few.

Expand business scope

For a large-scale Miner innovative Mining company, it may be a good choice to expand into new business scope. Hut 8 is one of the largest digital asset miners in North America focusing on innovation, bullish on Bitcoin, blockchain, and Web3.0. Bridging the emerging and traditional high-performance computing world, and has invested heavily in high-performance GPU graphics card mining equipment, which allows them to use GPU graphics cards for other high-performance computing power businesses.

January 31, 2022 Hut 8 announced the completion of the acquisition of the TeraGo data center business, through which Hut 8 changed its business structure, creating the first hybrid data center model, while serving traditional high-performance computing (Web2 ) and Web3 and the emerging digital asset computing department. After the merger of Ethereum, the transformed traditional high-performance computing power business and Web3 computing power services related to Web3 infrastructure will be big miner's new revenue source opportunities, but it is obvious that this choice requires the miner to have top-level resources and a large scale, and it is not a path that ordinary miners can choose.

Provide computing power for Web3 protocol

Miners can turn GPU computing power to provide computing power for a few web3 protocols such as: Render Network, Livepeer Network, Akash Network, etc.

Render Network is a high-performance distributed rendering network based on GPU. Users can consume RNDR's GPU computing power to render images at a faster speed and at a lower cost. At the same time, miners can also provide its own GPU to provide rendering computing power for Render Network to earn rewards

Livepeer Network is a decentralized video transcoding network built on the Ethereum blockchain. Livepeer provides a back-end video transcoding and distribution infrastructure on which developers can build applications. Miners can provide GPU computing power to run a node on the Livepeer network that earns block rewards by charging fees for video transcoding.

Akash Network, the world’s first decentralized and open-source cloud, accelerates deployment, scale, efficiency and price performance for high-growth industries like blockchain and machine learning/AI. Known as the “Airbnb for Cloud Compute”, Akash Network provides a fast, efficient and low-cost application deployment solution. Developers leveraging the Akash platform can access cloud computing at three times the cost of centralized providers such as Amazon Web Services, Google Cloud and Microsoft Azure. Akash Network leverages containerization and open source technologies to leverage 85% of the underutilized cloud computing power of 8.4 million global data centers, enabling anyone to buy and sell cloud computing, and Miner can use GPU Mining devices to provide Akash Network Cloud computing power to earn block rewards.

Sell mining equipment for ETH and stake POS or hold cash for other purposes

Miner uses the funds obtained from selling mining equipment in exchange for ETH to become a POS validator node to obtain block rewards or to obtain additional income in the form of MEV (Miner extractable value), which requires the validator to stake at least 32 ETH to receive block rewards. The rate of return will change with the amount of ETH staked and network activities. For miners who have less than 32 ETH or are unwilling to take the risk of node operation, they can obtain income through collection staking or staking of service providers. For most miners even if the POS skating income is not as high as POW, it is a long-term sustainable profit option

Since Ethereum POW carries a huge amount of computing power that other ecosystems can hardly absorb such huge computing power, so not every POW miner can find a profitable solution for computing power transfer, so a large number of miners may choose to sell mining equipment to cover the cost.

(1) "Oligopoly governance"?

As one of the largest public chain ecosystems in Web3, governance has always been an aspect of great concern. The people involved in governance in Ethereum are mainly divided into three groups.

Users: End users who hold ETH and use Ethereum applications, trading platforms, and developers building applications on top of Ethereum.

Miners: An individual or business entity that runs a server node to validate transactions and secure the network (and earn ETH).

Ethereum Core Developers: Developers and researchers who contribute to node software and participate in various technical forums.

Anyone can submit a proposal called Ethereum Improvement Proposal (EIP) on Github. It is not difficult to propose; the difficulty is to make the proposal reasonable and supported by the community. Once the EIP is submitted, it will go through a cycle of technical review, research and discussion.

• Draft - When properly formatted, the EIP editor will merge the EIP into the EIP repository

• ReviewEIP - The author marks the EIP as ready and requests peer review.

• Last Call - An EIP that has gone through its initial iteration and is ready to be reviewed by the community.

• Accepted - An EIP has been in Last Call for at least two weeks, and the developer has addressed all requested technical changes.

• Final - EIPs that the core developers have decided to implement into various clients (Geth, Nethermind, etc.) and release in a future hard fork, or EIPs that have already been released in a hard fork.

The proposal procedure shows that it is very inefficient to implement a proposal, and that the core Ethernet developers hold absolute decision-making power, which reflects some of the problems with Ethereum governance.

The governance mechanism tends to be oligarchic: Ethereum currently reaches consensus through the off-chain community, and proposals must be approved by the community. However, the proposal process is generally controlled by core developers for discussion and many node operators decide whether to implement it or not. ETH holders only have the right to express their opinions off-chain without actual voting rights. Compared with on-chain governance, the democratic foundation has certain deficiencies, and the personal influence of Vitalik is too strong. One person has a decisive influence on the entire Ethereum community.

The governance structure is too narrow: Currently, most of the EIP proposals are proposed by core developers and foundations, and the content mainly includes technology upgrades and patches. With the gradual maturity of Ethereum, issues such as compliance, secondary market, decentralized financial ecology or user experience need to be discussed in the proposal, not just at the technical level, but the technology upgrade is what developers are good at. In this field, the threshold for ordinary participants to participate in governance is too high.

From the perspective of the governance framework, the governance of Ethereum is completely dependent on the core developers of Ethereum and miner. It seems that participation in governance is a very high threshold for ordinary users. At present, the upgrade proposal of Ethereum 2.0 does not mention any changes to the governance structure. After the upgrade of Ethereum 2.0, Ethereum may still continue to have this centralized governance structure. If there is a disagreement within the Ethereum Foundation or serious problems with the influence and credibility of Vitalik, Ethereum may enter a state of governance chaos, which is a relatively big risk for the overall ecosystem of Ethereum. The Ethereum Foundation and Vitalik may need to consider how to optimize the governance structure.

(2) After the Ethereum 2.0 upgrade, security enhancement can also be reflected in the cost of doing evil for POW and POS.

The Cost of Doing Evil Under the POW Mechanism

In brief, the POW mechanism determines the right of block creation by computing power, and the security of this mechanism comes from the decentralization of computing power. In theory, if someone controls more than 50% of the computing power, he has the absolute advantage of obtaining the right of bookkeeping. It means he can create blocks faster, and then tampers with the blockchain data. If someone wants to do evil under the POW mechanism, he needs to control more than 50% of the total computing power of the entire network, and launch a "51% attack". If someone wants to launch a "51% attack", firstly he needs to have more computing power than other miners, which requires a very large amount of money to buy equipment and pay a lot of electricity bills. In addition, the computing power distribution is completely transparent on the blockchain network, and everyone can see what percentage of computing power the leading groups have. When someone tries to buy a large number of mining hardware to increase the computing power until it exceeds 51%, other miners will notice this matter and also add computing power to prevent concentration, which makes it extremely expensive and difficult to increase his computing power proportion beyond 51%. From an economic point of view, the cost of launching a "51% attack" is too high and the profit is too small which is not as good as honest mining. Therefore, it is also a question of whether it is worthwhile to launch a "51% attack".

The Cost of Doing Evil Under the POS Mechanism

In brief, the POS mechanism determines the chance of creating block by the amount of staked ETH and the security of this mechanism comes from the decentralization of staking. Under the POS mechanism, in order to launch an attack, someone needs to stake more than 51% of the ETH in the pool. In this case, the attack cost is much higher than that of the POW mechanism. Besides, the POS mechanism has a forfeiture mechanism. If the validator behaves dishonestly, his stake can be slashed. In the POW mechanism, the mining hardware purchased has at least residual value, while in the POS mechanism, once the assets are forfeited, it is an irreversible huge loss. The necessity of launching an attack under the POS mechanism is also controversial (what kind of profit is worth the risk of losing all the principal). In terms of security, the POS mechanism is superior to the POW mechanism.

(3) While enhancing security, Ethereum 2.0 may face more serious centralization problems

The centralization problem under the POW mechanism before the Ethereum 2.0 upgrade

As the Ethereum ecosystem grows larger and larger, the number of users is increasing, and the computing power of the entire network continues to grow. Under the POW mechanism, miners with low computing power have a very small chance of getting block rewards by mining, so it is a popular choice for small miners to join a Pool (a pool that gathers the computing power of large and small miners). Gathering a lot of computing power, pools have greatly increased probability of mining blocks and then distributing the rewards to miners according to a certain distribution method. However, with the continuous expansion of the pools, Ethereum’s computing power has shown a trend of centralization. A large amount of computing power is concentrated in several pools. According to the data from Etherscan, the top three pools are Ethermine (28.2340%), F2Pool Old (13.2992%), and Hiveon Pool (10.4076%). The excessive concentration of computing power seriously threatens the security of Ethereum ecosystem, which is the biggest concern for the Ethereum Foundation. Now the combined computing power of the top three pools has exceeded 51%. If they launch a "51% attack" jointly, it can be definitely achieved. From the perspective of Vitalik and the Ethereum Foundation, the rapid growth of the miner group has enabled the "miner alliance" to threaten the security of the Ethereum network, which is a thing that Vitalik and the Ethereum Foundation fear and cannot tolerate.

The centralization problem under the POS mechanism after the Ethereum 2.0 upgrade

Since the POS mechanism determines the chance of creating block by the amount of staked ETH, this means the centralization problem of Ethereum has changed from the centralization of computing power to the centralization of staking. This is an absolute advantage for ETH whales. At the same time, the existence of staking protocols will also lead to more severe centralization problems. Due to the existence of liquid staking protocols such as Lido and other collection staking service providers, many Miners who are dissatisfied with 32 ETH threshold or do not want to take the risk of node operation will choose to participate in collection staking, which will lead to excessive concentration of ETH on one protocol or staking service provider.

The current staking distribution chart of Ethereum shows that 31.72% of the total staked ETH is on Lido protocol, and 14.52% of the total staking is on Coinbase, which ranks second. The centralization of the market is very obvious. In addition, because of the intrinsic characteristics of POS, the rich may become richer and richer, and the chips of giant whales will continue to increase, making the chips of retail investors to be a drop in the bucket. What’s more, the Ethereum Foundation holds a large amount of ETH and has an absolute advantage. After the Ethereum 2.0 upgrade, the centralization problem will become increasingly serious. But at the same time, considering the cost of doing evil, the security of POS mechanism is much higher than that of POW mechanism at the mathematical level. The combination of higher security and more centralized trends may seem contradictory, which has also been a hot controversy over Ethereum 2.0.

(4) After the Ethereum 2.0 upgrade, will there be a death spiral in Ethereum under extreme market conditions?

What is death spiral?

Will the changes in the consensus mechanism of Ethereum 2.0 put Ethereum at a potential risk of death spiral? Before discussing this issue, it is necessary to understand what a death spiral is. In brief, it is a vicious cycle that leads to a series of stampede reactions and finally collapses.

It’s just like when LUNA crashed. The mechanism of LUNA is that $1 worth of LUNA can mint $1 worth of UST. Smart contracts cannot be tampered with, and this mechanism maintains the value of UST through market arbitrage. When Terra had liquidity problems, UST depegged from the value of $1, and a large number of people bought UST minted LUNA for under $1 for arbitrage. Many people buy UST for less than $1 to mint LUNA for arbitrage. More and more LUNA was minted, but the liquidity of the stablecoins on the Terra quickly dried up as many people sold LUNA. Many people began to use cross-chain bridges to transfer assets, causing blockchain congestion, so that people cannot arbitrage to eliminate the price difference. Panic began to spread and the death spiral finally started. More and more UST holders minted LUNA with devalued UST and dumped it.LUNA was hyperinflationary and was sold off heavily. As UST remains decoupled, UST holders continue to mint LUNA, and LUNA continues to inflate. LUNA will be constantly minted as long as UST does not return to $1 value. However, due to liquidity exhaustion, UST could not return to $1, and the price of LUNA could not stop the plunge until the Terra blockchain stopped creating blocks. LUNA's death spiral was caused by the joint efforts of flawed economic model design, liquidity problems and a stampede of panic.

Will there be a death spiral in Ethereum 2.0？

Let’s see the economic model of Ethereum. Under the POW mechanism, ETH is mined by computing power, and consumed by paying GAS fees to complete on-chain transactions. After converting to POS, the way to obtain ETH will be staking ETH and getting incentivised. Compared with the POW mechanism, the inflation under the POS mechanism is lower, from about 4.3% to about 0.22%. Thanks to the Ethereum network's performance enhancement and cost reduction, the demand for Ethereum network usage will also increase, and thus stimulate the growth of burning volume. In terms of the tokenomics, Ethereum does not have a binding mechanism of burning and minting like LUNA, so Ethereum does not have a design flaw that will lead to a death spiral.

When the price of Ethereum fluctuates violently, will stakers withdraw their staked ETH and sell it, which leads to a death spiral of ETH? In terms of the staking mechanism, before the "Shanghai upgrade", stakers cannot withdraw the staked ETH; after the "Shanghai upgrade", withdrawal is opened, and stakers will be free to withdraw the staked ETH. So when the price of Ethereum fluctuates violently, will people withdraw their staked ETH and sell off?

Analysing from the perspective of investors’ psychology, when the market fluctuates violently, it is usually small investors who panic and sell assets at a low price, while large investors usually buy low and sell high. Therefore, even if the price of Ethereum fluctuates sharply, it is true that some people will withdraw their staked ETH and sell it, but it will not lead to a death spiral.

First of all, the rewards of Ethereum staking will fluctuate with the total value of staked ETH. For the firm holders of Ethereum, the reduction of staked volume will increase their yield rate. Even if the price of Ethereum fluctuates violently, it is only a short-term selling pressure for Ethereum, which is not enough to cause a stampede market. For the firm holders of Ethereum, it is a really good thing for them to buy chips at a low price at this time. In addition, the increase in yield rate caused by the reduction in the amount of staking will attract more staking, which may just be a constant shuffling process for Ethereum rather than a death spiral.

So under what circumstances will everyone sell off Ethereum and lead to a death spiral? I think it may only be a very serious problem in Ethereum itself that causes the entire ecosystem to collapse. This situation currently appears to be almost impossible.

(5). Since the probability of the death spiral happening is very small, will Ethereum 2.0 have a hard fork because of the disagreement with miners?

Before discussing whether there will be a hard fork in Ethereum 2.0, let’s explain what a hard fork and a soft fork are and what is the difference between them.

When there is a serious disagreement in the blockchain, it may cause a fork. Besides, the addition and upgrade of some protocols may also need to be implemented through forks.

Hard fork: A hard fork is defined as a permanent divergence in the blockchain. After the release of the new consensus, some nodes that have not been upgraded cannot verify the blocks generated by the upgraded nodes. At this time, a hard fork will occur. When a hard fork occurs, two blockchains with the same ledger before a certain block are created.

The most typical case is the hard fork of Ethereum and Ethereum Classic: The DAO is a crowdfunding project initiated by the blockchain company Slock.it. On April 30, 2016, The DAO project started crowdfunding, the project token is DAO, and the crowdfunding time was 28 days. The DAO raised more than 12 million Ethereum, accounting for 14% of the total amount of Ethereum at that time, which was worth more than 150 million US dollars. More than 11,000 people participated in this crowdfunding. But The DAO's code has a major flaw that allows attackers to steal ETH from the decentralized organization. The hackers stole roughly $50 million worth of ETH. This was a big blow to Ethereum at the time, so after intense discussions in the community, Vitalik Buterin, the founder of Ethereum, decided to implement a hard fork to roll back the losses. However, some people adhere to the principle that the blockchain cannot be tampered with and refuse to upgrade, so Ethereum was split into Ethereum Classic and Ethereum.

Soft forks: Soft forks are softer than hard forks. After the release of the new consensus, nodes that have not been upgraded will generate invalid blocks because they do not know the new consensus, resulting in temporary forks. The old and new nodes coexist without affecting the stability and effectiveness of the entire system. The old node can be compatible with the new node, but the new node cannot be compatible with the old node. The two will coexist on the chain until the upgrade is completed. The soft fork will not lead to the emergence of two blockchains.

Will there be a hard fork in Ethereum 2.0? My answer is there is a possibility. Although the upgrade proposal is mainly proposed and decided by the core developers of Ethereum, it will ultimately be executed by the miners. Since the upgrade of Ethereum 2.0 completely harmed the interests of miners and caused strong dissatisfaction among them. Most miners have no choice but to sell mining hardware and find another cryptocurrency to do mining works, so the upgrade of Ethereum is very likely to face resistance from miners. It is still possible for the miners to unite to sell in revenge, or initiate a hard fork.

Compared with the POW mechanism, the POS mechanism has lower rewards, but it is more environmental-friendly, relatively centralized, less inflation, higher security and higher TPS. Although the ideal POS mechanism will make the Ethereum ecosystem more sustainable, it will be full of unknowns after it is truly implemented since it is not time-tested.

The POS mechanism makes the biggest beneficiaries transfer from the miners to the Ethereum Foundation and stakers, which arouses the dissatisfaction of stakeholders headed by miners, who face the problem of where to go. Although a small amount of computing power can be migrated to other ecosystems, most miners may have to sell mining hardware in exchange for ETH to become stakers or to do something else. This is a loss of interest for most miners, which makes it possible to encounter some retaliatory behaviors during the upgrade of Ethereum 2.0, such as selling off and hard forks.

Let’s explore the changes in Ethereum 2.0 from a few other views. In terms of governance structure, the decision-making of Ethereum is basically in the hands of the Ethereum Foundation and core developers. Besides, Vitalik’s personal influence is too large, and the scope of governance proposals is too narrow, which will lead to the oligarchy of Ethereum’s governance. In terms of potential risks, the probability of Ethereum's death spiral is minimal, but the more threatening risks actually come from the increasing trend of centralization. Especially after the implementation of the POS mechanism, collection staking makes the staking protocols like Lido coconcentrate a lot of staked ETH, resulting in serious centralization. However, it can be seen from the characteristics of Ethereum 2.0 that it has higher security than the POW mechanism and a very high cost of doing evil. When high security and a more centralized trend are combined, these two seem to be contradictory, which is a point that has been debated for a long time.

Translation: @Yue, @Chauncey

Profreading: @Diamond

Layout：@Coucou

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